Tuesday, October 13, 2015

WSJ: The 'Cadillac Tax' Makes Everyone Sick

The 'Cadillac Tax' Makes Everyone Sick

By Tevi Troy

13 October 2015

The Wall
Street Journal

In
apparent recognition of the distinct unpopularity of the Affordable Care Act's
Cadillac tax -- an excise tax on high-value, employer-provided health benefits
-- more than 100 economists have signed a letter defending it. As the Washington
Post headline about the letter read: "101 Economists Just
Signed a Love Letter to the Obamacare Provision Everyone Else Hates."

As
of 2018, the excise will impose a 40% levy on employer-sponsored health plans
whose value exceeds $12,500 for an individual and $27,500 for a family. The
definition of value includes all benefits, such as wellness plans or employer
contributions to flexible spending accounts, and the tax is intended to get
employers to reduce the benefits these high-cost plans confer (and perhaps even
to encourage employers to stop providing health care to employees so they
migrate toward the ACA exchanges). Some 175 million Americans are enrolled in
employer-sponsored health plans, and the tax will affect increasing numbers of
plan holders. This is why the tax is so widely disliked, even before anyone is
directly affected by it.

The
Cadillac tax is so disliked that politicians and interest groups on both sides
of the aisle want to get rid of it.

There are few health-care issues that unite
Hillary Clinton and Bernie Sanders with congressional Republicans, or unite
unions with business, but opposition to the excise tax is one. Mrs. Clinton and
Mr. Sanders have declared their opposition to the tax, while multiple
congressional bills would eliminate it.

The
reason the tax has so many opponents is its impact on American workers. It is
going to force employers, who understandably do not want to pay the steep 40%
levy, to reduce the benefits they offer in order to bring the costs of their
plans below the ACA's value threshold.

Worse,
because the thresholds at which the tax kicks in for individuals and families
are indexed to overall inflation and not to faster-rising health-care costs,
the tax will have a creeping impact on employees. Like the dreaded Alternative
Minimum Tax, which was designed to hit fewer than 155 wealthy Americans in 1969
but now impacts 4.2 million households with incomes of $83,400 or more, the
Cadillac tax will pull more and more Americans into its net.

According
to a new study by the American Health Policy Institute, the excise tax is
already forcing American employers to revisit the health care they provide to
employees. Almost 90% of large employers surveyed by AHPI reported taking steps
to prevent their company from having a plan that triggers the excise tax in
2018.

Nineteen
percent of those surveyed -- top human-resource officers at companies with more
than 1,000 employees -- said they were already curtailing or eliminating
employee contributions to flexible-spending accounts to avoid triggering the
tax. Nearly 13% were already curtailing or eliminating employee contributions
to health savings accounts. Both FSAs and HSAs are popular ways for employees
to cope with the increasing number of high-deductible health plans, as they
allow workers to save for growing out-of-pocket health costs.

When
employers respond to the tax by shrinking the value of employee health plans,
that amounts to a reduction in the overall compensation package employees are
getting. Supporters of the tax theorize that workers will get wage increases to
offset the fact that their benefit package has been reduced. In reality, 71% of
large employers surveyed by the American Health Policy Institute said they
probably wouldn't increase wages to offset their reduction in health benefits.
Among the 16% of employers who said they would increase wages, their workers
are not necessarily better off: Unlike the lost benefits, wage increases will
be subject to income tax.

Providing
some kind of limit to the amount of the tax advantage employers get for
providing health care to employees could make some sense if it were designed
the right way -- for instance, by making some portion of employer-provided
health benefits taxable above a certain income ceiling, without penalizing
lower-wage employees. But the consistent unpopularity of the proposed excise
tax and the bipartisan efforts to eliminate it reveal that American people of
all incomes understand better than the 101 economists the costs of the Cadillac
tax and the damage it would do.

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Mr.
Troy is the president of the American Health Policy Institute and a former
deputy secretary of the Department of Health and Human Services in the George
W. Bush administration.